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This introductory chapter begins with a brief discussion of the real cost of sovereign debt. It then describes the three parts of the book. An overview of the chapters included in this volume is presented.

International debt markets have gone through major changes during the past 20 years. Reduction in capital controls and privatization of the manufacturing and banking sectors created a higher demand for international debt, which is debt denominated in nondomestic currencies, from the private sector. This major change had important consequences. While international debt crises used to be attributed to state mismanagement of borrowed funds, such crises are now largely due to poor performance in the private sector. Yet, corporate debts have several advantages compared with sovereign debts. The chapter begins by discussing new developments and describing the impact on country risk and cost of capital. Next, the chapter explains how these developments affect the international financial architecture by describing the differences between corporate and sovereign debt. International bond issuance and the latest developments are then discussed to explain the impact of these main changes.

This chapter discusses the four major financial crises that broke out in the core industrial countries between the end of Bretton Woods in 1971 and the early 21st century: the Financial Instability of the early 1970s and the ensuing bank failures, especially in Britain, Germany, and the United States, within the context of ‘stagflation’ and the end of fixed exchange rates; the International Debt Crisis of 1982, when the international financial system was threatened with collapse; the Japanese Banking Crisis of 1997–8, which undermined the financial system of the world's second largest economic power; and the Financial Debacle of 2007–8.

This paper argues that many sovereign debt restructurings as agreed between defaulting states and their multilateral, bilateral, or private creditors constitute exercises of international public authority. Their authoritative character results from their effects on the citizens of the defaulting state, especially through adjustment programs. They also affect taxpayers in lending states as well as private creditors. Their public and international character derives from their legal basis in hard or soft public international law. As a consequence of their qualification as exercises of international public authority, sovereign debt restructurings need to be framed by public law in order to ensure their legitimacy. This paper shows how legal scholarship might promote the development of such a public law framework. The paper then proposes a set of legal principles for sovereign debt restructurings. Some of them might already exist de lege lata, while others should be understood as proposals de lege ferenda. Legal scholarship is especially useful for developing procedural requirements, while substantive issues require a political decision, with the exception of the need to respect fundamental human rights. Most importantly, however, the qualification of sovereign debt restructurings as exercises of public authority requires domestic and international courts and tribunals to defer to them and to stay enforcement as long as such restructurings are being negotiated or implemented. A general principle of law to that effect seems to be emerging. In deciding about a stay, domestic and international courts and tribunals might control the legitimacy of sovereign debt restructurings.

Chapter 7 looks at Mexico's radical economic policy responses and adjustment to the adverse shocks of the debt crisis of 1982 and the oil price collapse of 1986, which implied an about face in the nation's traditional development agenda from the mid-1980s onward. It shows how the adjustment problems conditioned the results of the various stabilization programs attempted, from a failed initial orthodox strategy attempted to an “heterodox shock” in late 1987. It describes in detail the macroeconomic reform process launched in this decade, including trade liberalization (which ultimately led to NAFTA), the deregulation of foreign direct investment and financial markets, the privatization of public enterprises, and the watering down of industrial policies. The chapter includes sections on competition policy and the deregulation of tertiary activities, as well as on the reforms to the land tenure system and agricultural policy.

This chapter describes Chile's experience with capital account restrictions and exchange rate policy. Chile did not suffer a sudden stop but a current account reversal due to policy reactions and a “sudden start” in capital outflows. The banks in Chile during the 1990s mediate a relatively low share of international debt inflows. In the years after the capital account was fully liberalized and the exchange rate floated, banks have begun playing a significantly larger role in debt inflows. Those countries with fixed and managed exchange rates are more prone to increases in external debt, and capital controls do not play a significant role in decreasing debt inflows. The Chilean experience was the result of a reversal in the current account, induced primarily by a very tight monetary policy and domestic liquidity squeeze, a sharp decline in terms of trade, and a strong defense of the peso.